Credit Cards – Do You Read the Fine Print?

What are some terms in credit card agreements that could surprise you if you don’t take the time to read the fine print—things like late fees, interest rate increases, fees for cash advances, balance transfer fees. The offers look wonderful if you buy into what the large print promises! But if you think it’s a headache to read the smaller print now, wait until you fall into one of the traps set for you in the fine print.

Credit Card Agreements – Designed to Be Complicated

According to an article on MSN money, the problem goes beyond the fact that credit card agreements are printed in such small fonts that they are physically difficult to read. They are also written in a complex legal language that is beyond the ability of the average applicant to understand.[1] Because the credit card agreement is a legal document, there may be no way around some of that, yet there are certain areas in the agreement that deserve special attention.

The card comparison site, Card Hub, found that almost all of the top 10 issuers of credit cards bury important information in the midst of text-heavy paragraphs. Things like balance transfer fees, late payment penalties, interest rates are often buried so they are easy to overlook.

Credit Card Fine Print – Six Things to Make Sure You Find

Credit Card Trap #1: 0% Interest Rate Intro Rate

That offer says you will be paying 0% on any purchases or balance transfers. The question is for how long? And what will the rate be afterwards. While recent changes in the law stipulate that this rate be for at least six months, there are no regulations on how high the interest rate may go after the intro period expires.

A great intro rate isn’t worth much if you run up a balance, then have to start paying a high interest rate on that balance. There’s another trap related to those great intro rates. We’ll discuss it next.

Credit Card Trap #2: Balance Transfer Fees

Most of the time, when you get that 0% Interest Rate offer, you see a balance transfer offer right along with it suggesting that now is the time to get those higher interest rate balances transferred. The question is how much is it going to cost to transfer that balance?

A typical offer charges between 3-5% of the amount of money you transfer. This means that unless you are looking at a very high interest rate of say 23% and a permanent rate with the new card of say 8.9%, you are going to end up with a worse deal a few months from now, especially if you make minimum payments. You will be paying interest on the 3-5% you paid to transfer the balance.

The picture is even worse if you don’t check the fees connected with the transfer. Usually the fine print sets a minimum fee for the transfer. The fine print can range from as low as $5.00 for a balance transfer minimum fee to $25.00. That’s the bottom fee, but what is the maximum fee. Some offers set a maximum fee, which can be leveraged to the consumer’s advantage if everything else has been carefully considered.

But beware of the offer that doesn’t set a limit on the maximum fee. 5% of a $5,000 transfer is $250.00 of additional debt which you will have to pay interest on. This is fine print you can’t afford to ignore.

Credit Card Trap #3: “Up to” or “As Low As” Phrases

These are the legal phrases that give credit card companies the ability to raise your credit card rates. For example, the agreement may warn that if you are late on a credit card payment, you could have your interest rate increased “up to” a much higher default rate. Knowing what that rate is and what triggers it is essential. “As low as” doesn’t guarantee that a rate will be as low as promised on the offer. Often, you don’t find out what your rate really is until you have the card and have already arranged a balance transfer.

Credit Card Trap #4: Rewards

Reward cards are very appealing, but there are several things you must check on. How quickly do you earn points or cash back? Do points expire? Or does the card have a cap on how many points/dollars can be earned in a year? It can take several years to earn enough points to “purchase” something of genuine interest. Recently many of the frequent flyer point bonuses have disappeared.

If you are considering a rewards card, pay careful attention to these questions. A reward that sets a cap on how many points or how much cash you can earn in a year or forces you to use points before you have accrued enough to get something you really want isn’t really offering you anything worthwhile at all.

Credit Card Trap #5: Payment Grace Period

This is another area in the fine print that you don’t want to ignore. How long do you have from when the credit company mails its statements to when payment has to reach them? While 25 days is the standard, there are credit cards with shorter grace periods. If you are uncomfortable with doing business online, then a shorter grace period could lead to undesirable late fees and high interest rates.

Credit cards start the countdown from the day the bill is printed. It may take up to seven days for that bill to reach you in the mail. If you don’t pay the bill within a day of its arrival to your home, there is the risk that your payment will not make it back to the credit card company in time. You can’t trust the department handling payments to note the day you postmarked your letter. The only thing that matters to the credit card company is the day the payment arrived.

The best way to deal with the grace period trap is to set up automatic bill pay online. You can set this for the minimum payment. Then if you wish to pay more on your account, set up a second payment.

Credit Card Trap #6: Yearly Credit Card Fees

This fee is back again. If you don’t check the fine print, you may find yourself paying anywhere from $25 to $75.00 a year to just have your credit card. Most companies will refund the fee once your purchases reach a certain amount. The problem is this amount can be $2,400 or more. The credit card company encourages you to pay all your bills, purchase your groceries, etc. with their card in order to spend that much money. Here’s the trap. Unless you are able to pay your credit card off every month in full, you will be going even deeper into debt by paying interest on those everyday expenses.

There are more traps to watch out for in the yearly credit card fees. A typical clause might say:

Annual Membership Fee: If your account is an annual membership fee it will be billed each year or in monthly installments (as stated in the Rates and Fees Table), whether or not you use your account, and you agree to pay it when billed. The annual membership fee is non-refundable unless you notify us that you wish to close your account within 30 days of the date we mail your billing statement on which the annual membership fee is charged and at the same time, you pay your outstanding balance in full. Your payment of the annual membership fee does not affect your right to close your account or limit your right to make transactions on your account. If your account is closed by you or us, we will continue to charge the annual membership fee until you pay your outstanding balance in full and terminate your account relationship.

Do you see the traps? As long as you have a balance, you could pay an annual membership fee, which you have to pay interest on. The only way to get out of paying this fee, if your account has an annual membership fee, is to close the account. But you cannot stop the charge of the annual membership fee until you pay off the balance, and if you do close the account.

Don’t Be a Victim of Credit Card Traps!

When you read the fine print, it becomes apparent that more than one trap can be included in a clause. Here is an example.

Grace Period and Accrual Finance Charges: We accrue periodic finance charges on a transaction, fee, or finance charge from the date it is added to your daily balance until payment in full is received on your account. However, we do not charge periodic finance charges on new purchases billed during the billing cycle if we receive payment of your new balance by the date and time your minimum payment is due, and we receive payment of your new balance on your previous billing statement by the date and time your payment was due. This exception or “grace period” applies only to purchases and does not apply to balance transfers, balance transfer checks, cash advances, cash advance checks or overdraft advances, if applicable.

The bold print that suggests that this clause deals with grace periods. Yet the way this clause is written makes it very difficult to understand what a grace period actually is and how long it lasts. Instead of using the term grace period, the credit card switches to “the date and time your minimum payment is due.” That is the grace period.

Note that there is an exception to how finance charges are accrued. If you have made a balance transfer, were withdrawn cash from an ATM, use one of the cash advance checks, or take advantage of overdraft advances, interest charges start from the day you make the transaction.

Credit card companies encourage you to take cash advances because they usually charge their highest interest rate on cash advances. This is an entirely different trap that we have not even discussed. The credit card companies regularly send you checks in the mail, knowing that if you use them they will make more money based on the same clause.

Just this one clause in the credit card agreement alone highlights how important it is to look at the fine print. If you take the time to find the clauses in the credit card agreement that deal with these six issues, you will catch most of the traps the credit card companies set for consumers.

You will be in a better position to choose the best card available to you. You will also enter into a credit card agreement fully informed as to what you can expect from the credit card company. This is a major step toward not being a victim of credit card traps. Rather, you can benefit from your card choice, instead of the credit card company being the one who gets the most benefits.